Buy To Let renaissance as yields hit six year high…

The average gross rental yield reported by landlords has reached the highest level since the second quarter of 2018, according to Paragon Bank.

After increasing for the third successive quarter, average gross rental yields reported by landlords hit 6.1% in Q1 2024. 

This is the first time average yields have surpassed the 6% mark since the end of 2021 and the highest since Q2 2018 when average yields of 6.2% were achieved by landlords.

Almost 800 landlords were asked about their current gross rental yield. It highlighted how Houses in Multiple Occupation have the potential to generate higher rental yields compared to single self-contained properties – 7.0% vs. 5.8% on average.

Richard Rowntree, Paragon Bank Managing Director of Mortgages, says: “Against what has been a challenging economic backdrop, landlords are naturally looking for ways to maximise returns, but they are also attempting to mitigate the impact of a tax burden that has increased in recent times. Alongside their yield generation potential, HMOs appeal to investors because of strong demand for affordable homes, particularly in areas where tenants would perhaps not be able to afford to buy or rent a whole property.

“This is particularly evident at the moment, with high levels of rental inflation. Alongside a stabilisation of house prices, it is likely that this has contributed to improving yields.”

He adds: “While strong yields are good news for landlords, we recognise that this rental inflation poses a very real challenge for tenants so are buoyed by reports of improving levels of housing stock in the sector. This is because addressing the imbalance between supply and demand is central to keeping rents at an affordable level and also means that tenants have more choice when choosing a home. A thriving market, where landlords can operate profitable lettings businesses, is crucial in encouraging investment in this stock and making more homes available for renters.”

In addition to variation amongst property types, the study also revealed regional differences in yields achieved.

The highest average yields of 7.0% were achieved by landlords in North East England, followed by those in neighbouring Yorkshire & The Humber who reported yields of 6.6%.

Likely influenced by significantly higher than national average property prices, landlords in England’s capital recorded more modest returns. Those in Outer London saw the lowest average yields of 5.2% while landlords in Central London achieved 5.7%, separated by lettings business owners in Wales who reported yields of 5.6%, the second lowest.